Alexander Balakhnin OOO Goldman Sachs Bank +7 (495) 645 4016 [email protected]Russian internet: Economics and investor perception The Goldman Sachs Group, Inc. May 2011 The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Goldman Sachs Research
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Alexander Balakhnin OOO Goldman Sachs Bank +7 (495) 645 4016 [email protected]
Russian internet: Economics and investor perception
The Goldman Sachs Group, Inc.
May 2011
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html.
Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Goldman Sachs Research
Goldman Sachs Global Investment Research
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Key internet activities
Key internet activities cover communication, entertainment and commercial needs of people
Normally, internet properties are involved in more than one internet activity
A variety of activities helps increase reach of product, improve relevance, build dominance
Some internet activities are more complementary than others
Source: Goldman Sachs Research
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Drivers of internet properties’ success
We identify three drivers for the long-term success of internet properties: Dominance, Relevance and Monetization
While niche projects may exist, they are vulnerable in the long term, as dominance enables more time for business model adjustment
While monetization is the primary goal of any project, it may have a negative impact on relevance and building dominance
However, without monetization, it is nearly impossible to build relevance and dominanceSource: Goldman Sachs Research .
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How are properties monetized?Internet monetization matrix
Source: Goldman Sachs Research
banner contextualsuper-
focusedlisting fees
API revenue sharing
virtual items paid service
social networking
communications
MMO
e-commerce
mobile VAS
portals
payment systems
search
ADVERTISING IVAS
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Need to be an innovative leader to existInternet properties’ survival cycle
Long-term sustainability requires ongoing replication of previous success
Successful product may soon become profitable, but product life is short
Resting on laurels gives competitors an opportunity, which may push a property out of business
Monetization should be innovative, as it threatens dominance build-up
Product build-up may require inorganic development
Source: Goldman Sachs Research estimates
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Reasons for high bargaining power of internet properties
Source: Goldman Sachs Research
Monetization is negative for business long termand hence inventory supply is managed wisely
Supply is less competitive than it may look
Competition risks are imminent for internet properties; but it is difficult to replicate somebody’s
success
Start-ups hit ratio is close to zero
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Case study: Economics of successCash flow generation of Odnoklassniki and VKontakte
Source: Company data, Goldman Sachs Research .
Internet start-ups require sufficient investments for a long period of time
Profitability is high, but it is compensation for low initial visibility
Even after years of investment, success and dominance are not guaranteed
Odnoklassniki (US$ mn) Vkontakte (US$ mn)
-5.0
33.0
1.520.9
46.7
68.9
-3.1
-17.1
-21.8
-31.4
-4.0 -4.9
-7.4
-10.3
-15.0
-5.0
5.0
15.0
25.0
35.0
45.0
55.0
65.0
75.0- OK accumaluated cash flow
- Revenues
- Opex & taxes
- Capex
2008 2009 20102007
-2.0
3.3
5.3
27.3
47.4
-0.6
-3.2
-12.0
-25.9
-2.1-6.0
-10.9
-14.1
-15.0
-5.0
5.0
15.0
25.0
35.0
45.0- VK accumulated cash flow
- Revenues
- Opex & taxes
- Capex
2008 2009 20102007
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Mail.ru profitability and cost structure
Source: Company data, Goldman Sachs Research estimates
Regions share in local SE revenues Regions share in search requests
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Reg AC
I, Alexander Balakhnin, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
DisclosuresMay 24, 2011
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Disclosures
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Global
Buy Hold Sell
32% 53% 15%
Buy Hold Sell
49% 41% 40%
As of April 1, 2011, Goldman Sachs Global Investment Research had investment ratings on 3,191 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and view s and related def initions' below .
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Disclosures
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Disclosures
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